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Patents and Monopoly Privilege

Sunday, October 1, 2000

“Discovery can give no right of ownership, for whatever is discovered must have been already here to be discovered. If a man makes a wheelbarrow, or a book, or a picture, he has a moral right to that particular wheelbarrow, or book, or picture, but no right to ask that others be prevented from making similar things. Such a prohibition, though given for the purpose of stimulating discovery and invention, really in the long run operates as a check upon them.”

—Henry George,

Progress and Poverty

The role and scope of patents has recently emerged as a point of debate among pundits, legislators, and corporate executives. High-profile legal battles, such as those between Amazon.com and Barnes and Noble over one-click shopping and between Priceline.com and Microsoft over price-searching software, have drawn attention to the inadequacy of the current system of patent law.

Jeff Bezos, who is Amazon.com’s chief executive, recently called for a revision in the patent protection afforded to software and Internet companies primarily by shortening the duration of patents to three to five years instead of the current 17-year term.

And beneath these more prominent companies, many smaller entrepreneurs and start-ups are beset with what they perceive as frivolous lawsuits regarding new software and business processes.

Former software executive and angel investor Peter Schaeffer has railed against “promiscuous patenting” and noted that “I have not seen any evidence that the Patent Office really understands software.”[1]

Many cases could serve to illustrate Schaeffer’s point. Two MIT professors filed a software patent infringement suit against AskJeeves. They allege that the Internet search engine company’s “natural language queries,” which conduct searches based on questions in plain English, violate their patent. They are seeking royalty payments and an order to prevent AskJeeves from selling or using natural-language-based tools.[2]

This case has yet to be decided and the legal experts who have commented on it say that the professors won’t win. However, many cases have been successful so far. In December 1999, a federal court granted Amazon a temporary injunction against b&n.com (Barnes and Noble) for “one click” online shopping. In another recent case, Stac Electronics won a $120 million suit against Microsoft. The threat of patent litigation is quickly becoming a big problem for many technology companies.

“Promiscuous patenting” is not new. In the 1970s, SCM Corporation brought a suit against Xerox Corporation charging that the company was maintaining a “patent thicket” of sleeping patents to pre-empt rivals. The court acknowledged Xerox’s success in building a web of patents to deter rivals, but nonetheless ruled that SCM was not entitled to any damages because Xerox’s patents were obtained legally.

While not new, the problem will only get more serious in the so-called New Economy. According to the U.S. Department of Commerce, the number of new patents issued annually nearly doubled from 60,000 per year to over 110,000 per year from 1970 to 1992. And yet, by the department’s own research, just over 6,000 new products were introduced annually. This points to the fact that many patents go unused or are employed as sleeping patents to deter potential new rivals.

Rothbard’s Critique

The late Murray Rothbard provided free-market advocates with a systematic critique of the patent system that gives many answers and points to a way out of the current confusion. The analysis, which is presented in his treatise, Man, Economy, and State, is the source of the Rothbard quotations below and the basis for this discussion.[3]

Nearly everyone seems to want to treat patents and copyrights in the same way. Two notable exceptions are Rothbard and Henry George. As Rothbard acknowledged, both a patent and a copyright are exclusive property rights and both protect innovations. However, legal enforcement of the two differs. As Rothbard wrote, “The crucial difference is that copyright is a logical attribute of property right on the free market, while patent is a monopoly invasion of that right.”

In a copyright infringement suit the plaintiff must show that the defendant had access to and reproduced the work in violation of his contract with the seller. In other words, independent discoverers are not penalized and copyright infringement is not ruled in cases where similar works were produced independently. In this way, copyright infringement is implicit theft.

As Henry George wrote, “The copyright is not a right to the exclusive use of a fact, an idea, or a combination . . . . It does not prevent anyone from using for himself the facts, the knowledge, the laws or combinations for a similar production, but only using the identical form of a particular book.” For George, then, a copyright rests on “the natural, moral right of each one to enjoy the products of his own exertion, and involves no interference with the similar right of any one else to do likewise.”

A producer marks his work “copyright” and, as a condition of sale, the buyer agrees not to reproduce the work. This is part of a basic right of freedom of contract and would be supported in a free market. Rothbard’s “acid test” for any policy or law was: “Is the outlawed practice implicit or explicit theft? If it is, then the free market would outlaw it; if not, then its outlawry is itself government interference in the free market.”

While copyright has its basis in the prohibition of implicit theft, the patent has no such basis and is thus completely different in its enforcement.

As Rothbard notes, the patent is an exclusive grant of monopoly privilege for the first inventor. Any subsequent inventors, no matter how unaware they were of the first inventor’s efforts, are debarred by violence from using their invention.

Henry George, in comparing the patent and copyright, wrote, “The patent, on the other hand, prohibits any one from doing a similar thing, and involves, usually for a specified time, an interference with the equal liberty on which the right of ownership rests . . . . It prohibits others from doing what has already been attempted.”

Encouraging Innovation

The patent is defended usually on grounds that it encourages innovation and that without it, the incentive to incur the cost and risk of inventions would be diminished.

To say the patent is needed because it encourages innovation is to implicitly assume that the free market is not innovative enough. This is an arbitrary belief, and patent defenders who espouse such a view are asserting their own arbitrary preferences. The free market has its own rational test for any new undertaking, indeed, for allocations of all kinds: present against future, between different branches of production, between different goods, and even between research expenditures and other forms of investment. Profits and losses guide entrepreneurs to serve consumers according to consumer preferences, as expressed in their buying and abstention from buying.

Criticism of the pattern of production that emerges from the expressed preferences of consumers is, then, arbitrary. In a free market, of course, those who believe that there is not enough innovation are free to invest funds for this purpose or to undertake research programs of their own. However, to force a distinct pattern of production through the use of patents is a violation of property rights.

Second, without the existence of patents, the incentive to innovate in patentable technologies would be diminished. But understand that with the existence of patents resources are artificially diverted from their most economical use, again as expressed by the buying public. As Rothbard wrote, “Coercively to encourage research expenditures would distort and hamper the satisfaction ofconsumers and producers on the market.” Since resources are scarce, this artificial stimulation of patentable research comes at the expense of those technologies that are not patentable.

The proper free-market policy is to extend copyright protection to inventors of machines, processes, and the like and to eliminate the whole body of patent law. Inventors could mark their creations “copyright,” serving notice that anyone who buys the machine buys it on the condition that it will not be reproduced and sold. As Rothbard wrote, “The patent is incompatible with the free market precisely to the extent that it goes beyond the copyright.”

The copyright would be perpetual and would pass to the inventor’s heirs and assigns. Anything else would be a violation of the basic property right of ownership. Rothbard wrote, “If the State decrees that a man’s property ceases at a certain date, this means that the State is the real owner and that it simply grants the man use of the property for a certain period of time.”

Independent inventors ought to be allowed to use and sell their invention, whether or not someone else has the protection of the government patent office. To prohibit that is to violate the property rights of independent discoverers. []

Notes

Dan Egbert, “Patents: The New Threat to Entrepreneurs?” in Washington Techway, March 13, 2000.

Paul Milstein Professor of Real Estate at Columbia Business School, where he is also the Research Director of the Paul Milstein Center for Real Estate. In addition, he has also been a Visiting Scholar at the Federal Reserve Bank of New York, and Research Associate at the National Bureau of Economic Research.